1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1996 Commission File No. 1-5591
PENNZOIL COMPANY
(Exact name of registrant as specified in its charter)
Delaware 74-1597290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Pennzoil Place, P.O. Box 2967
Houston, Texas 77252-2967
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 546-4000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X . No .
Number of shares outstanding of each class of common stock, as
of latest practicable date, October 31, 1996:
Common stock, par value $0.83-1/3 per share, 46,537,819
shares.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
PENNZOIL COMPANY
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(Expressed in thousands except per share amounts)
REVENUES $ 653,688 $ 600,012 $1,877,609 $1,881,965
COSTS AND EXPENSES
Cost of sales 360,013 373,665 1,071,762 1,129,101
Selling, general and administrative expenses 88,432 103,759 257,979 306,217
Depreciation, depletion and amortization 68,727 73,050 207,726 256,476
Exploration expenses 8,306 4,706 30,014 25,087
Taxes, other than income 13,688 12,736 41,035 41,318
Impairment of long-lived assets (See Note 2) - 399,830 - 399,830
Interest charges, net 43,585 48,322 137,952 144,568
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX 70,937 (416,056) 131,141 (420,632)
Income tax provision (benefit) 5,812 (140,770) 25,704 (143,299)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 65,125 $ (275,286) $ 105,437 $ (277,333)
=========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE $ 1.40 $ (5.95) $ 2.27 $ (6.00)
=========== =========== =========== ===========
DIVIDENDS PER COMMON SHARE $ .25 $ .75 $ .75 $ 2.25
=========== =========== =========== ============
AVERAGE SHARES OUTSTANDING 46,494 46,273 46,445 46,216
=========== =========== =========== ===========
END OF PERIOD SHARES OUTSTANDING 46,518 46,303 46,518 46,303
=========== =========== =========== ===========
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
3
PART I. FINANCIAL INFORMATION - continued
PENNZOIL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, December 31,
1996 1995
------------- -------------
(Expressed in thousands)
ASSETS
Current assets
Cash and cash equivalents $ 33,082 $ 23,615
Receivables 198,253 335,876
Inventories
Crude oil, natural gas and sulphur 25,132 41,363
Motor oil and refined products 129,933 119,830
Deferred income tax 20,351 26,452
Other current assets 68,944 57,689
------------- -------------
Total current assets 475,695 604,825
Property, plant and equipment, net 2,231,251 2,418,025
Marketable securities and other investments 955,058 910,334
Other assets 325,261 374,592
------------- -------------
TOTAL ASSETS $ 3,987,265 $ 4,307,776
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 1,656 $ 2,263
Notes payable - 468,934
Accounts payable and accrued liabilities 228,277 330,263
Interest accrued 49,324 35,358
Other current liabilities 80,882 81,450
------------- -------------
Total current liabilities 360,139 918,268
Long-term debt 2,139,880 2,038,921
Deferred income tax 242,043 227,941
Other liabilities 297,720 286,414
------------- -------------
TOTAL LIABILITIES 3,039,782 3,471,544
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY 947,483 836,232
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,987,265 $ 4,307,776
============= =============
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
4
PART I. FINANCIAL INFORMATION - continued
PENNZOIL COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30
---------------------------------
1996 1995
----------- -----------
(Expressed in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 105,437 $ (277,333)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization 207,726 256,476
Impairment of long-lived assets - 399,830
Dry holes and impairments 5,240 7,917
Deferred income tax 14,805 (148,461)
Non-cash and other nonoperating items (9,474) (4,978)
Change in operating assets and liabilities 16,516 158,624
----------- -----------
Net cash provided by operating activities 340,250 392,075
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (400,815) (288,801)
Acquisition of Viscosity Oil - (33,642)
Purchases of marketable securities and other investments (433,716) (496,287)
Proceeds from sales of marketable securities and other
investments 443,469 490,056
Proceeds from sales of assets 463,360 90,964
Other investing activities (3,214) (5,975)
----------- -----------
Net cash provided by (used in) investing activities 69,084 (243,685)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayments) of notes payable, net (167,755) 165,334
Debt and capital lease obligation repayments (1,419,731) (208,741)
Proceeds from issuance of debt 1,222,206 25,000
Dividends paid (34,839) (104,009)
Other Financing Activities 252 -
----------- -----------
Net cash used in financing activities (399,867) (122,416)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,467 25,974
CASH AND CASH EQUIVALENTS, beginning of period 23,615 24,884
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 33,082 $ 50,858
=========== ===========
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
5
PART I. FINANCIAL INFORMATION - continued
PENNZOIL COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) General -
The condensed consolidated financial statements included
herein have been prepared by Pennzoil Company ("Pennzoil") without
audit and should be read in conjunction with the financial
statements and the notes thereto included in Pennzoil's latest
annual report. The foregoing financial statements include only
normal recurring accruals and all adjustments which Pennzoil
considers necessary for a fair presentation. Certain prior period
items have been reclassified in the condensed consolidated
financial statements in order to conform with the current year
presentation.
(2) Adoption of New Accounting Standards -
In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," which established
an elective new standard on accounting for stock-based
compensation. SFAS No. 123 establishes a fair value-based method
of accounting for stock-based compensation plans awarded after
December 31, 1995 and encourages companies to adopt the accounting
method set forth in SFAS No. 123 in place of the existing
accounting method, which requires expense recognition only in
situations where stock compensation plans award intrinsic value to
employees at the date of grant. Companies that elect not to follow
SFAS No. 123 for accounting purposes must make annual pro forma
disclosure of its effects.
As of January 1, 1996, Pennzoil adopted SFAS No. 123 using the
pro forma disclosure method described in the pronouncement.
Accordingly, adoption of the statement did not affect Pennzoil's
results of operations or financial position. Information required
by SFAS No. 123 relating to stock-based compensation will be
included in footnotes to Pennzoil's audited financial statements.
Effective July 1, 1995, Pennzoil adopted the requirements of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," which is intended to
establish more consistent accounting standards for measuring the
recoverability of long-lived assets. In certain instances, the
statement specifies that the carrying values of assets be written
down to fair values, which, for Pennzoil, resulted in write-downs
that were previously not required under its prior impairment
policy. The charges, which totaled $265.5 million ($399.8 million
before tax), or $5.74 per share, as of July 1, 1995, resulted
primarily from the more detailed impairment review procedures that
were required on Pennzoil's proved oil and gas properties. In
determining whether an asset is impaired under the new standard,
assets are required to be grouped at the lowest level for which
there are identifiable cash flows that are largely independent of
the cash flows of other groups of assets. On this basis, certain
fields in North America were deemed to be impaired because they
were not expected to recover their entire carrying value through
the future cash flows expected to result from the operation of the
field and its eventual disposition. Under Pennzoil's prior
policy, oil and gas assets reviewed for impairment were grouped at
a higher level.
6
PART I. FINANCIAL INFORMATION - continued
(3) Transactions Involving Oil and Gas and Other Assets -
In July 1996, Pennzoil completed two related transactions with
Gulf Canada Resources Limited ("Gulf Canada"): (i) the
establishment of a joint venture for the development of natural gas
reserves in the Zama area of northern Alberta and (ii) the sale by
Pennzoil of its remaining, non-strategic Canadian oil and gas
assets. After working capital and closing adjustments, Pennzoil
received net proceeds of US $192.8 million from the sale of the
Canadian oil and gas assets to Gulf Canada. No material pretax
gain resulted from the sale, but an approximate $19 million tax
benefit was recorded in the third quarter of 1996. The sale
included 840,000 net acres of land, 75 percent of which is
undeveloped. The properties sold were located in Alberta and
northwestern British Columbia and included net proved reserves of
approximately 35 million barrels ("MMbbls") of oil equivalent and
in July 1996 were producing approximately 5.5 thousand barrels
("Mbbls") per day of liquids and 34 million cubic feet ("MMcf") per
day of natural gas, net of royalties. Included in Pennzoil's
consolidated results are revenues of $26.9 million and operating
income of $.2 million from these properties during the first six
months of 1996.
In July 1996, Pennzoil completed the sale of approximately half
of its interest in the Azeri-Chirag-Gunashli ("ACG") joint
development unit offshore Azerbaijan in the Caspian Sea to Exxon
Azerbaijan Limited ("Exxon"), ITOCHU Oil Exploration Co., Ltd.
("ITOCHU") and Unocal Khazar, Ltd. ("Unocal"). The three
companies will pay approximately $130 million to Pennzoil for a 5
percent working interest in the ACG unit (3.0006 percent to Exxon,
1.4705 percent to ITOCHU and 0.5289 percent to Unocal) and the
right to receive 51 percent of the payments due Pennzoil for
reimbursement of costs incurred in developing a gas utilization
project for the Gunashli Field. Cash payments are scheduled in
three installments with the first installment having been made in
two payments consisting of approximately $83 million received at
closing and another $5 million received in August 1996. Subsequent
installments of $22 million and $20 million are due at first
production and when the unit reaches production of 200,000 barrels
per day, respectively. Pennzoil retains a 4.8175 percent working
interest in the ACG unit. As part of the transaction, the three
companies will fund all of Pennzoil's future obligations in the ACG
project, retroactive to January 1, 1996, until all such
expenditures and accrued interest are recovered from Pennzoil's
share of production from the ACG unit. Pennzoil received a net
cash payment of approximately $16 million in August 1996 for
reimbursement of Pennzoil's obligations in the ACG unit incurred
from January 1996 through July 1996. No gain or loss resulted from
this transaction as proceeds from the sale were applied to reduce
Pennzoil's net investment in the ACG unit.
In addition to its interest in the ACG unit, Pennzoil holds a
30 percent interest in a definitive exploration, development and
production sharing contract covering the Karabakh prospect, also
located in the Caspian Sea. The Karabakh agreement was ratified by
the Azerbaijan Parliament in February 1996.
In the first quarter of 1996, Pennzoil substantially completed
its domestic asset highgrading program and the related disposition
of noncore oil and gas assets commenced in 1992. Excluding proceeds
from the two sales discussed above, proceeds from the sale of oil
and gas assets totaled $88.6 million for the nine months ended
September 30, 1996 with $88.1 million of those sales occurring
during the first quarter of 1996. Gains or losses on such sales
during the nine months ended September 30, 1996 were insignificant.
In September 1996, Pennzoil completed the sale of Vermejo Park
Ranch to Vermejo Park, L.L.C., a Georgia limited liability company.
The ranch is located in northern New Mexico and southern Colorado
and is approximately 578,000 acres. Pennzoil recorded a pretax
gain of $41.3 million from the sale in the third quarter of 1996.
7
PART I. FINANCIAL INFORMATION - continued
(4) Acquisitions -
In April 1995, Pennzoil Gas Marketing Company, an indirect
wholly owned Pennzoil subsidiary ("PGMC"), and BRING Gas Services
Corp. ("BRING"), a subsidiary of Brooklyn Union Gas Co., formed
PennUnion Energy Services L.L.C. ("PennUnion"), a 50-50 gas
marketing joint venture. In September 1996, Pennzoil Energy
Marketing Company, an indirect wholly owned Pennzoil subsidiary
("PEMC"), purchased the 50% interest in PennUnion owned by
BRING. Pennzoil is actively seeking a partner or partners to
help develop and expand this business and anticipates reducing its
total ownership interest in PennUnion to 50% or below in the near
future.
In September 1995, Pennzoil Products Company ("PPC"), a
wholly owned subsidiary of Pennzoil, acquired the assets of the
Viscosity Oil division ("Viscosity") of Case Corporation
("Case") for $33.6 million. The acquisition was financed by a
combination of cash on hand and borrowings under Pennzoil's
commercial paper and money market line facilities. The acquisition
was accounted for using the purchase method of accounting and
results of operations of Viscosity subsequent to September 1995 are
reflected in Pennzoil's consolidated statement of income.
(5) Accounts Receivable -
In September 1996, Pennzoil Receivables Company ("PRC"), a
wholly owned special purpose subsidiary of Pennzoil, entered into a
receivables sales facility, which provides for the ongoing sales
of up to $135 million of accounts receivable of certain Pennzoil
subsidiaries. The facility expires in September 1997. Sales of
accounts receivable under this agreement totaled $128.0 million as
of September 30, 1996. Pennzoil used the proceeds to reduce
outstanding debt. Fees incurred on the sale of accounts
receivable were not material in the third quarter of 1996 and are
included in other income, net.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Net income for the quarter and nine months ended September 30,
1996 was $65.1 million, or $1.40 per share, and $105.4 million, or
$2.27 per share, respectively. This compares with net losses of
$275.3 million, or $5.95 per share, for the third quarter of 1995
and $277.3 million, or $6.00 per share, for the nine months ended
September 30, 1995. Effective July 1, 1995, Pennzoil adopted the
requirements of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Results for the quarter and nine months ended September 30, 1995
include a charge of $265.5 million ($399.8 million before tax), or
$5.74 per share, as of July 1, 1995 to reflect the impairment of
long-lived assets.
Excluding the net charges associated with the impairment of
long-lived assets in 1995, earnings increased $74.9 million and
$117.2 million for the quarter and nine months ended September 30,
1996, respectively, compared to the prior year. Results for the
third quarter and nine months ended September 30, 1996 include a
$41.3 million pretax gain on the sale of Vermejo Park Ranch and an
approximate $19 million tax benefit associated with the sale of
Canadian oil and gas assets. In addition, earnings for the third
quarter and nine months ended September 30, 1996 increased compared
to the prior year due to improved results from the oil and gas
segment, lower overall operating costs and lower general and
administrative expenses.
8
PART I. FINANCIAL INFORMATION - continued
Oil and Gas
Operating income from this segment for the quarter and nine
months ended September 30, 1996 was $60.7 million and $175.5
million, respectively. This compares with operating income of
$19.5 million and $64.9 million, respectively, for the same periods
in 1995. The increase in operating income for both the quarter and
nine months ended September 30, 1996 was primarily due to higher
natural gas prices, lower operating and general and administrative
expenses and lower depreciation, depletion and amortization
("DD&A") expense. The lower DD&A expense experienced in the third
quarter of 1996 was primarily due to a decrease in natural gas and
liquids volumes resulting from the disposition of noncore oil and
gas properties. The lower DD&A expense experienced during the
nine months ended September 30, 1996 was primarily attributable to
lower DD&A rates as a result of the July 1, 1995 write-down of
assets associated with the adoption of SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," and to a decrease in natural gas and liquids
volumes resulting from the disposition of noncore oil and gas
properties.
Effective July 1, 1995, Pennzoil adopted the requirements of
SFAS No. 121 which, in certain instances, specifies that the
carrying values of assets be written down to fair values. For
Pennzoil, this resulted in write-downs of proved oil and gas
properties that were not required under its prior impairment
policy. The pretax charge taken in the third quarter of 1995 for
the asset impairment of Pennzoil's proved oil and gas properties
was $378.9 million.
Natural gas price realizations averaged $1.80 per thousand
cubic feet ("Mcf") and $1.81 per Mcf, respectively, for the quarter
and nine months ended September 30, 1996, compared to $1.32 per Mcf
and $1.39 per Mcf, respectively, for the same periods in 1995.
Natural gas volumes produced for sale were 599.6 MMcf per day and
596.0 MMcf per day, respectively, for the quarter and nine months
ended September 30, 1996, compared to 662.9 MMcf per day and 687.9
MMcf per day, respectively, for the same periods in 1995. Liquids
production volumes were 58.4 Mbbls per day and 61.3 Mbbls per day,
respectively, for the quarter and nine months ended September 30,
1996, compared to 64.6 Mbbls per day and 69.1 Mbbls per day,
respectively, for the same periods in 1995. The decrease in
natural gas and liquids volumes resulted from the disposition of
noncore oil and gas properties.
In July 1996, Pennzoil completed two related transactions with
Gulf Canada: (i) the establishment of a joint venture for the
development of natural gas reserves in the Zama area of northern
Alberta and (ii) the sale by Pennzoil of its remaining, non-
strategic Canadian oil and gas assets. After working capital and
closing adjustments, Pennzoil received net proceeds of US $192.8
million from the sale of the Canadian oil and gas assets to Gulf
Canada. No material pretax gain resulted from the sale, but an
approximate $19 million tax benefit was recorded in the third
quarter of 1996. The sale included 840,000 net acres of land, 75
percent of which is undeveloped. The properties sold were located
in Alberta and northwestern British Columbia and included net
proved reserves of approximately 35 MMbbls of oil equivalent and in
July 1996 were producing approximately 5.5 Mbbls per day of liquids
and 34 MMcf per day of natural gas, net of royalties. Included in
Pennzoil's consolidated results are revenues of $26.9 million and
operating income of $.2 million from these properties during the
first six months of 1996.
9
PART I. FINANCIAL INFORMATION - continued
In July 1996, Pennzoil completed the sale of approximately half
of its interest in the ACG joint development unit offshore
Azerbaijan in the Caspian Sea to Exxon, ITOCHU and Unocal. The
three companies will pay approximately $130 million to Pennzoil for
a 5 percent working interest in the ACG unit (3.0006 percent to
Exxon, 1.4705 percent to ITOCHU and 0.5289 percent to Unocal) and
the right to receive 51 percent of the payments due Pennzoil for
reimbursement of costs incurred in developing a gas utilization
project for the Gunashli Field. Cash payments are scheduled in
three installments with the first installment having been made in
two payments consisting of approximately $83 million received at
closing and another $5 million received in August 1996. Subsequent
installments of $22 million and $20 million are due at first
production and when the unit reaches production of 200,000 barrels
per day, respectively. Pennzoil retains a 4.8175 percent working
interest in the ACG unit. As part of the transaction, the three
companies will fund all of Pennzoil's future obligations in the ACG
project, retroactive to January 1, 1996, until all such
expenditures and accrued interest are recovered from Pennzoil's
share of production from the ACG unit. Pennzoil received a net
cash payment of approximately $16 million in August 1996 for
reimbursement of Pennzoil's obligations in the ACG unit incurred
from January 1996 through July 1996. No gain or loss resulted from
this transaction as proceeds from the sale were applied to reduce
Pennzoil's net investment in the ACG unit.
In addition to its interest in the ACG unit, Pennzoil holds a
30 percent interest in a definitive exploration, development and
production sharing contract covering the Karabakh prospect, also
located in the Caspian Sea. The Karabakh agreement was ratified by
the Azerbaijan Parliament in February 1996.
In the first quarter of 1996, Pennzoil substantially completed
its domestic asset highgrading program and the related disposition
of noncore oil and gas assets commenced in 1992. Excluding proceeds
from the two sales discussed above, proceeds from the sale of oil
and gas assets totaled $88.6 million for the nine months ended
September 30, 1996 with $88.1 million of those sales occurring
during the first quarter of 1996. Gains or losses on such sales
during the nine months ended September 30, 1996 were insignificant.
In September 1996, Pennzoil and a subsidiary of Enterprise Oil
plc ("Enterprise") agreed to form a strategic alliance to pursue
certain exploration opportunities on 102 leases in Pennzoil's Gulf
of Mexico portfolio where Pennzoil's working interest is 50 percent
or more. Enterprise will earn an interest equal to half of
Pennzoil's working interest in each prospect (and any leases within
the portfolio into which the prospect extends) by contributing
funds towards the costs of drilling a jointly-agreed upon
exploration well on each prospect. On 59 of the 102 leases within
the portfolio, where Pennzoil's average equity is 92 percent,
Enterprise has agreed to contribute funds to cover 100 percent of
such costs, subject to a minimum investment of $100 million through
1998. On the remaining 43 leases, where Pennzoil's average equity
is 80 percent, Enterprise has agreed to cover 66.66 percent of such
costs, with no minimum commitment, through 1999. These periods may
be extended by one year and two years, respectively, if Enterprise
elects to increase its minimum commitment from $100 million to $150
million. During the next two to three years, Pennzoil and
Enterprise expect to drill about 20 wells under the program.
In April 1995, PGMC and BRING formed PennUnion, a 50-50 gas
marketing joint venture. In September 1996, PEMC purchased the
50% interest in PennUnion owned by BRING. Pennzoil is actively
seeking a partner or partners to help develop and expand this
business and anticipates reducing its total ownership interest in
PennUnion to 50% or below in the near future.
10
PART I. FINANCIAL INFORMATION - continued
Motor Oil & Refined Products
Operating income from this segment for the quarter and nine
months ended September 30, 1996 was $9.5 million and $39.7 million,
respectively. This compares to operating income of $11.9 million
and $39.6 million, respectively, for the same periods in 1995.
The decrease in operating income for the quarter ended
September 30, 1996 from the comparable period in 1995 was
primarily attributable to lower refining margins and to pre-
operating expenses related to the start-up costs of Excel
Paralubes, a joint venture partnership with Conoco, Inc. for
construction and operation of a new lube base oil plant near Lake
Charles, Louisiana. Construction was completed in October 1996 with
product shipments to begin in December 1996. The lower refining
margins were primarily the result of higher crude oil prices and
higher operating expenses. Higher domestic marketing operating
results offset lower refinery margins, resulting in operating
income for the nine months ended September 30, 1996 being
essentially flat compared to the same period last year.
In September 1995, PPC acquired the Viscosity Oil division of
Case for $33.6 million. Viscosity is a leading supplier of premium-
quality lubricants to the North American off-road industry and it
supplies lubricants to substantially all of the Case dealer
network, with locations in all 50 states and Canada. In addition,
Viscosity supplies virtually all of the factory fill lubricants for
Case's North American manufacturing plants. As part of the
acquisition, a long-term supply agreement was entered into whereby
Pennzoil will supply the aftermarket lubricant products that Case
will continue to sell to its dealerships. The agreement also calls
for Pennzoil to supply factory-fill lubricants to Case. The
acquisition was financed by a combination of cash on hand and
borrowings under Pennzoil's commercial paper and money market line
facilities.
Franchise Operations
The franchise operations segment, operating through Pennzoil's
wholly owned subsidiary Jiffy Lube International, Inc. ("Jiffy
Lube"), recorded operating income of $6.2 million and $16.0
million, respectively, for the quarter and nine months ended
September 30, 1996. This compares with operating income of $5.4
million and $10.3 million, respectively, for the same periods in
1995. The increase in operating income for the three months ended
September 30, 1996 is primarily due to lower selling, general and
administrative ("SG&A") expenses partially offset by startup costs
associated with 27 company-operated centers opened since June 30,
1996. Results for the nine months ended September 30, 1995
included net charges of $6.0 million related to litigation
settlements. Results for the first nine months of 1996 reflect the
first quarter impact of severe winter weather-related costs in the
northeastern part of the United States where Jiffy Lube has a high
concentration of company-operated stores as well as the startup
costs associated with 68 company-operated centers opened since
December 31, 1995. These costs were partially offset by lower SG&A
expenses for the nine month period as compared to the prior year.
Domestic systemwide sales reported on a comparable store basis
for the three months ended September 30, 1996 decreased $4.2
million and for the nine months ended September 30, 1996 increased
$6.9 million, from comparable periods in 1995. There were 1,332
domestic lube centers (including 514 Jiffy Lube company-operated
centers) open as of September 30, 1996. Total domestic systemwide
sales increased 4.9% to $180 million for the quarter and increased
6.4% to $523 million for the nine month period.
11
PART I. FINANCIAL INFORMATION - continued
Beginning in 1995, Jiffy Lube and the Sears Merchandise Group
("Sears") agreed to open fast-oil change units in Sears Auto
Centers over a three year period. Under the agreement, Jiffy Lube
remodels, equips and operates service areas within the Sears Auto
Centers, while Sears continues to utilize the remaining bays for
its operations. As of September 30, 1996, there were 88 Jiffy Lube
units open and operating within Sears Auto Centers. Sears and
Jiffy Lube will continue to review the market and work toward
agreement on the final plans for additional units.
Other
Other operating income for the quarter and nine months ended
September 30, 1996 was $51.6 million and $77.4 million,
respectively, compared with $10.5 million and $58.4 million for the
same periods in 1995. The increase in other operating income for
the quarter and nine months ended September 30, 1996 compared to
the same period in 1995 was primarily due to the gain on the sale
of Vermejo Park Ranch and to higher investment income.
In September 1996, Pennzoil completed the sale of Vermejo
Park Ranch to Vermejo Park, L.L.C., a Georgia limited liability
company. The ranch is located in northern New Mexico and southern
Colorado and is approximately 578,000 acres. Pennzoil recorded
a $41.3 million pretax gain on the sale in the third quarter of 1996.
Other operating income for the nine months ended September 30,
1995 includes a favorable resolution of a Texas franchise tax
issue which resulted in Pennzoil receiving a $23.2 million refund
in the second quarter of 1995. In addition, Pennzoil received
approximately $1.5 million in interest in 1995 associated with the
franchise tax refund.
Pennzoil's other income includes dividend income of $9.8
million and $27.9 million for the quarter and nine months ended
September 30, 1996, respectively, from its investment in common
stock of Chevron Corporation ("Chevron"). In July 1996, Chevron
increased the amount of quarterly dividends paid to holders of its
common stock from $.50 per share to $.54 per share. Pennzoil
beneficially owns approximately 18 million shares of common stock
of Chevron.
Net interest expense for the quarter and nine months ended
September 30, 1996 decreased $4.7 million and $6.6 million,
respectively, from the same periods in 1995 primarily due to a
reduced amount of outstanding debt and increased capitalized
interest.
Capital Resources and Liquidity
Cash Flow. As of September 30, 1996, Pennzoil had cash and
cash equivalents of $33.1 million. During the nine months ended
September 30, 1996, cash and cash equivalents increased $9.5
million. Cash flows from operating activities totaled $340.3
million during the first nine months of 1996.
Accounts Receivable. In September 1996, PRC, a wholly owned
special purpose subsidiary of Pennzoil, entered into a receivables
sales facility, which provides for the ongoing sales of up to $135
million of accounts receivable of certain Pennzoil subsidiaries.
The facility expires in September 1997. Sales of accounts
receivable under this agreement totaled $128.0 million as of
September 30, 1996. Pennzoil used the proceeds to reduce
outstanding debt. Fees incurred on the sale of accounts
receivable were not material in the third quarter of 1996 and are
included in other income, net.
Debt Instruments and Repayments. In May 1996, Pennzoil entered
into a revolving credit facility with a group of banks which
provides for up to $600 million of unsecured revolving credit
borrowings through May 1997, with any outstanding borrowings at
such time being converted into a term facility terminating in May
12
PART I. FINANCIAL INFORMATION - continued
1998. Pennzoil has the option, subject to the extension of
additional credit by new or existing banks, to increase the size of
the facility by $100 million. This revolving credit facility
replaces and supersedes the previous revolving credit facility of
Pennzoil. As of September 30, 1996, borrowings under this facility
totaled $75.0 million.
As of September 30, 1996, borrowings under Pennzoil's
commercial paper and short-term variable-rate credit arrangements
totaled $301.2 million, all of which, beginning with the execution
of the aforementioned revolving credit facility, has been
classified as long-term debt. Such debt classification is based
upon the availability of committed long-term credit facilities to
refinance such commercial paper and short-term borrowings and
Pennzoil's intent to maintain such commitments in excess of one
year subject to overall reductions in debt levels. Similar
borrowings totaling $468.9 million were reflected as short-term
debt as of December 31, 1995.
In July 1996, Pennzoil completed the sale of its non-strategic
Canadian oil and gas assets to Gulf Canada. Pennzoil received net
proceeds of US $192.8 million, which were used to reduce
outstanding debt under Pennzoil's Canadian revolving credit
facilities.
In July 1996, Pennzoil completed the sale of
approximately half of its interest in the ACG joint development
unit offshore Azerbaijan in the Caspian Sea, and in September
1996, completed the sale of Vermejo Park Ranch. Pennzoil used the
proceeds from both of these sales to partially fund its 1996
capital spending program and to reduce outstanding debt.
Price Risk Management. Pennzoil has a price risk management
program that permits utilization of agreements and financial
instruments (such as futures, forward and option contracts and
swaps and collars) to reduce the price risks associated with
fluctuations in crude oil and natural gas prices. The primary
purpose of the program, as it relates to 1996 crude oil and natural
gas production, is to help provide Pennzoil with sufficient cash
from operations in 1996 to fund its capital spending program
without increasing debt. As of September 30, 1996, Pennzoil had
entered into transactions that committed an average of
approximately 309 MMcf per day of natural gas for the remainder of
1996 to be sold at fixed prices (New York Mercantile Exchange
("NYMEX")-based) ranging from $1.76 to $2.12 per Mcf, with a
weighted average price of $1.88 per Mcf, and Pennzoil had entered
into transactions that committed an average of approximately 37
Mbbls per day of crude oil for the remainder of 1996 to be sold at
fixed prices (NYMEX-based) ranging from $16.75 per barrel to $17.40
per barrel, with a weighted average price of $16.94 per barrel.
Pennzoil has not materially hedged crude oil or natural gas prices
beyond 1996. Pennzoil will constantly review and may alter its
hedged positions as conditions change.
13
PART I. FINANCIAL INFORMATION - continued
(UNAUDITED)
The following tables show revenues and operating income by segment,
other components of income and operating data.
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(Dollar amounts expressed in thousands)
REVENUES
Oil and Gas $ 186,797 $ 166,700 $ 566,097 $ 557,719
Motor Oil & Refined Products 426,475 380,801 1,258,141 1,159,802
Franchise Operations 78,626 76,791 226,617 216,790
Other 55,352 15,353 90,640 70,809
Intersegment sales (93,562) (39,633) (263,886) (123,155)
----------- ----------- ----------- -----------
Total revenues $ 653,688 $ 600,012 $1,877,609 $1,881,965
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS)
Oil and Gas $ 60,715 $ 19,548 $ 175,522 $ 64,931
Motor Oil & Refined Products 9,459 11,891 39,667 39,550
Franchise Operations 6,152 5,416 15,988 10,314
Impairment of long-lived assets - (399,830) - (399,830)
Other 51,609 10,475 77,411 58,389
----------- ----------- ----------- -----------
Total operating income (loss) 127,935 (352,500) 308,588 (226,646)
Corporate administrative expenses 13,413 15,234 39,495 49,418
Interest charges, net 43,585 48,322 137,952 144,568
----------- ----------- ----------- -----------
Income (loss) before income tax 70,937 (416,056) 131,141 (420,632)
Income tax provision (benefit) 5,812 (140,770) 25,704 (143,299)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 65,125 $ (275,286) $ 105,437 $ (277,333)
============ ============ =========== ===========
RATIO OF EARNINGS TO FIXED CHARGES 1.76 -
=========== ===========
AMOUNT BY WHICH FIXED CHARGES EXCEED EARNINGS $ - $ 424,080
=========== ===========
14
PART I. FINANCIAL INFORMATION - continued
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
OPERATING DATA
- --------------
OIL AND GAS
Net production
Crude oil, condensate and natural
gas liquids (barrels per day) 58,442 64,604 61,274 69,139
Natural gas produced for sale (Mcf per day) 599,615 662,923 595,967 687,863
Weighted average prices
Crude oil, condensate and natural
gas liquids (per barrel) $ 14.85 $ 14.00 $ 14.85 $ 14.46
Natural gas (per Mcf) $ 1.80 $ 1.32 $ 1.81 $ 1.39
MOTOR OIL & REFINED PRODUCTS
Sales (barrels per day)
Gasoline and naphtha 21,332 19,586 21,043 20,168
Distillates and gas oils 25,984 24,681 26,711 27,148
Lubricating oil and other specialty products 24,638 22,156 23,768 23,435
Residual fuel oils 4,221 3,140 4,120 3,654
----------- ----------- ----------- -----------
Total sales (barrels per day) 76,175 69,563 75,642 74,405
=========== =========== =========== ===========
Raw materials processed (barrels per day) 54,330 50,650 53,302 53,492
Refining capacity (barrels per day) 62,700 62,700 62,700 62,700
FRANCHISE OPERATIONS
Domestic systemwide sales (in thousands) $ 179,980 $ 171,627 $ 523,394 $ 491,839
Same center sales (in thousands) $ 166,658 $ 170,884 $ 495,295 $ 488,355
Centers open (U.S.) 1,332 1,165 1,332 1,165
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
PENNZOIL COMPANY
Registrant
S/N Michael J. Maratea
Michael J. Maratea
Vice President and Controller
November 12, 1996